Value in the takeover detail

The value that can be extracted from a takeover needs to be mapped out in fine detail. Photo: Marina Oliphant

Shaun Drummond

READER ROI

A detailed plan of what will be done with each asset and the benefits of doing so must be ready to execute.

Quick wins need to be made within a couple of months, both fixing problems and removing costs.

Costs will be the quickest to take out, revenue growth is the hardest to achieve and the hardest to prove.

Takeovers come in many forms. In the mining sector they’re relatively simple and add value almost immediately. For most sectors, however, extracting the benefits is a hard slog requiring the integration of people and back-end systems.

Before the so-called “legal day one” – when senior managers take up residence – a permanent deal thesis should be in place with criteria for targets and the returns expected, says Geoff Stalley, an integration specialist at Deloitte.

“Sometimes targets are on radars for a long time [and] you need to be constantly thinking where you are going to be targeting the market for growth and in some cases divesting,” he says.

When it comes to a specific target, the value that can be extracted from a tie-up needs to be mapped out in fine detail, adds colleague Tony Garrett. “This has to become something that is measured the hell out of,” he says.

Before the deal is done, that feeds into whether the company is suitable to buy and the price a company is willing to pay, which is crucial to whether it can get an adequate return from the integration. Sometimes a firm can beat a private equity buyer, for instance, because it can pay more based on the fact it can make greater gains from the skills or physical assets being put together.

Stalley says this deal thesis needs to form the basis of a plan that investors and employees understand, and it needs to be followed and reported on or investors and, crucially employees, may lose confidence.

Once merged, from day one it used to be that there was a “100-day execution” strategy that needed to be ready to go, he adds. “That’s way, way too long now. You have to be ready to operate straight away.”

Some quick wins need to be demonstrated. Nigel Lake, chief executive of corporate adviser Pottinger, says cost savings should be made more or less immediately. “It can be really boring things like insurance – you just go and get a quote for combining them for both companies and get some savings,” he says. “Financing costs – those savings can commence almost immediately.”

People are often the key to getting better returns and costs savings – short and long term. Who will stay and who will go in senior roles needs be known and done straight away. Two CFOs are usually not an option, for instance.

But often time needs to be taken to ensure the right people stay. “If you really are looking to take the best of both organisations, you need to . . . figure out who those people are and in a large transaction, that is quite an exercise,” Lake says. “You may want to make clear there will be an orderly process of working through who the best people are.” Otherwise there may be additional redundancy and rehiring costs.

Stalley says that to get the value promised from a deal, however, there needs to be a list of what will be done with each asset. “Not ‘we’re going to achieve a 5 per cent improvement in cost of sales – we’re going to take these three warehouses, we’re going to consolidate them into one, we’re going to change the contract with this, as a result we are going to get this much [cost reduction].’ ”

For many organisations, integrating back-end systems and getting better deals on shared infrastructure is another crucial cost saving. This may take years rather than weeks or months but it needs to be started straight away.

Lake points to Suncorp’s failure to do this when it took over GIO a decade ago as sowing the seeds for problems later. “They never created a single IT platform, they ended up with several.” So when it came to take over Promina just before the GFC, it had “a whole bunch of systems” that the new management team is only just integrating.

Revenue growth is rarely discussed by acquirers because it takes the longest and is the hardest to do. “Once the cost savings have been achieved, then what people look for is growth in the business,” Pottinger says. “Some of these may be achievable quite quickly, others may take many years.”

At the simplest level, he says, this takes the form of each of the merged companies trying to sell their products to the other company’s customers. Some mergers do this by keeping the brand alive, such as St George. Others change it but, take a long time to do it. “[Health insurance companies] Bupa and MBF effectively merged several years ago,” Stalley says. “But we’re only now seeing the Bupa name.”

Judging whether the combined entity has actually increased revenue beyond what either of the businesses could have achieved on their own “is a much more rubbery number,” Pottinger says.